A new way to invest after you retire
Fund companies entice baby boomers with new 'payout funds' that promise to stretch retirees' money over set time periods.
By Margaret Price | Contributor to The Christian Science Monitorfrom the December 31, 2007 edition
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New York - For years, workers have been wooed by financial firms to open IRAs. And at work, many have been herded into seminars on 401(k) retirement plan investing.
But aging baby boomers are about to face the flip-side issue on retirement savings: How to safely spend those accrued assets once they retire.
And mutual funds companies are rushing in to help with a wave of new offerings geared toward retirees.
In October, Fidelity Investments unveiled a series of 11 funds called Income Replacement Funds. Each of these funds has an end date, ranging in two-year increments, currently from 2016 to 2036, and a payout strategy designed to allow participants to take regular monthly withdrawals until no money is left. In January, Fidelity expects to unveil three additional such funds, with end dates of 2038, 2040, and 2042.
Other mutual fund companies also plan to offer their own version of payout funds for retirees: In September, the Vanguard Group announced plans to roll out three new funds, called Managed Payout Funds, for investors in retirement. Moreover, sources say Charles Schwab, John Hancock Funds, Russell Investment Co., and DWS Scudder also plan to offer payout funds for retirees.
Apparently no one expects the list of new funds – as well as other options, including more annuity offerings – to end there. "This is the beginning of a whole new universe that we are going to see in attempts to meet people's cash flow needs in retirement," says Harold Evensky, a financial planner in Coral Gables, Fla.
Potentially, the new funds could be one way of addressing a growing need. Even as hordes of baby boomers approach retirement, financial planners and others cite a dearth of information and guidance about when and how much to spend in retirement. Boomers question how to make their retirement money last for the rest of their lives – especially when faced with rising healthcare costs, inflation, and the issue of providing for a surviving spouse after one's death.
"People don't know when to take their money out [of retirement vehicles], the tax issues involved, when to take Social Security, which one to take when," Mr. Evensky points out. "We've spent decades telling people to save for retirement, but [the financial community has said] very little about ... getting the money out."
The timing of the new funds seems opportune as more people approach retirement age. According to the US Census Bureau, there were 17.8 million Americans age 55 to 59 in 2006, and another 13.2 million age 60 to 64.
While the size of boomer retirement nest eggs – if they have one – varies, 2007 survey data of the Employee Benefit Research Institute show that 48 percent of workers age 55 and older have savings and investments (excluding their pension and the value of their primary home) of at least $100,000.
A big target audience for the new funds: 401(k) plan participants leaving these plans as well as holders of IRAs about to retire, some fund companies say.
To some observers, payout funds offer notable attractions, including pricing, at least in some cases. For instance, Fidelity cites expense ratios for its payout funds that range from 0.54 to 0.65 percent – "some of the industry's lowest expense ratios," the company says of this category of retail funds. Vanguard estimates its managed payout funds will have a 0.58 percent expense ratio.
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